In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 05-4398

LILA T. GAVIN, on behalf of herself and

of all persons similarly situated,

Plaintiff-Appellant,

v.

AT&T CORP. and GEORGESON SHAREHOLDER

COMMUNICATIONS, INC.,

Defendants-Appellees.

____________

Appeal from the United States District Court

for the Northern District of Illinois, Eastern Division.

No. 01 C 2721—John F. Grady, Chief Judge.

____________

ARGUED JUNE 6, 2006—DECIDED SEPTEMBER 6, 2006

____________

Before FLAUM,Chief Judge, andPOSNER and KANNE, Circuit

Judges.

POSNER, Circuit Judge. This appeal requires us to consider the meaning of “in connection with the purchase or

sale of a covered security” in the Securities Litigation

Uniform Standards Act of 1998 (SLUSA), 15 U.S.C. § 78u-4

et seq. The Act provides that a class action, though filed in

state court under state law, may be removed to federal

district court if the suit alleges “(1) an untrue statement or
2 No. 05-4398

omission of a material fact in connection with the purchase

or sale of a covered security; or (2) that the defendant used

or employed any manipulative or deceptive device or

contrivance in connection with the purchase or sale of a

covered security.” 15 U.S.C. § 77p(b); see also § 78bb(f). A

“covered security,” defined in §§ 78bb(f)(5)(E), 77p(f)(3),

77r(b), is any security “traded nationally and listed on a

regulated national exchange.” Merrill Lynch, Pierce, Fenner &

Smith, Inc. v. Dabit, 126 S. Ct. 1503, 1512 (2006); see also

Green v. Ameritrade, Inc., 279 F.3d 590, 596 n. 4 (8th Cir.

2002). The Act further provides that a suit properly removed

under it must forthwith be dismissed by the federal court

because a suit based on fraud in the sale of securities

regulated under the federal securities laws cannot be

brought under state law. §§ 77p(b), 78bb(f)(1).

The defendants, sued for fraud in an Illinois state court on

behalf of a class of shareholders of MediaOne Group, Inc.,

removed the case to federal district court under SLUSA. The

judge denied the plaintiff’s motion to remand the case to the

state court and dismissed the suit, whereupon the plaintiff

filed a complaint in the district court under Rule 10b-5,

which the district judge dismissed on the merits. The appeal

mainly challenges the removal; the plaintiff wants to be

back in state court, suing under state law. Only if we refuse

to order the case remanded to the state court does she want

us to proceed to the Rule 10b-5 issue and reverse the district

court on the merits. That would place us in conflict with the

Second Circuit, which in a similar case brought by other

MediaOne shareholders (but in federal court, so avoiding

SLUSA) held that there was no fraud. Starr v. Georgeson

Shareholder, Inc., 412 F.3d 103 (2d Cir. 2005).

In June 2000, MediaOne merged with AT&T. The terms of

the merger entitled shareholders in MediaOne to obtain in
No. 05-4398 3

exchange for each of their shares 0.95 shares of AT&T stock

plus $36.27 and any accrued but unpaid dividends. This

package was the “Standard Election.” But MediaOne

shareholders could if they preferred select other combinations of shares and cash that would be equal in value to

the “Standard Election” share-cash package.

AT&T notified the MediaOne shareholders of their choices

on June 15 and explained that they could obtain the cash

and/or AT&T shares to which the choice they made entitled

them by mailing their MediaOne share certificates to

EquiServe Trust Company, AT&T’s exchange agent. There

was no charge for this service. The notice fixed a deadline of

July 14 for choosing any of the alternatives to the Standard

Election, but no deadline for the Standard Election itself.

On August 1, AT&T sent a follow-up notice to those

MediaOne Group shareholders who had not responded

to the first notice. The letter explained that they could

still exercise the Standard Election (though not the other

options, the July 14 deadline having passed), again through

EquiServe and again without charge.

Finally, on December 15, defendant Georgeson, hired

by AT&T to perform a postmerger “clean up” or “round

up,” mailed a notice on AT&T letterhead to those MediaOne

shareholders who still had not responded to either of the

previous notices. The letter urged them to exercise their

Standard Election rights by submitting their MediaOne

shares to Georgeson in exchange for either a combination of

cash and stock or an all-cash equivalent. The letter warned

that “eventually, if you continue to do nothing, your

[AT&T] stock and underlying assets will be turned over to

certain state authorities under the abandoned property

laws.” Remember that AT&T had set no deadline for the

Standard Election. Georgeson was reminding those
4 No. 05-4398

MediaOne shareholders who had not yet made an election,

and now were confined to the Standard Election because the

deadline for the alternatives had passed, that state abandonment law set a deadline.

Abandoned property escheats to the state after a specified

period, Uniform Disposition of Unclaimed Property Act

(1966), codified in Illinois as 765 ILCS 1025/0.05 et seq., and

shares of stock that are not claimed by the beneficial owner

are deemed abandoned. 765 ILCS 1025/2a. Either that Act

or the superseding Uniform Unclaimed Property Act (1995)

have been adopted in 29 states plus the District of Columbia, and most, perhaps all, other states have similar laws.

E.g., N.Y. Personal Property Law §§ 251-258 (McKinney

1992). In the state court, the plaintiff requested certification

of a nationwide class and in the alternative a statewide

(Illinois) class consisting of “all residents, or persons or legal

entities, who [are MediaOne shareholders and] may properly avail themselves of the Illinois Consumer Fraud Act.”

No class was ever certified.

Georgeson’s letter specified a fee of $7 per MediaOne

share for the exchange service offered in the letter and did

not mention that the recipients of the letter could still obtain

the Standard Election package at no charge through

EquiServe. The failure to mention that option is the fraud

charged in the complaint.

We do not think the alleged fraud can be said to be “in

connection with the purchase or sale of a covered security,”

namely stock in MediaOne. When the merger was consummated in June of 2000, MediaOne’s shareholders

became the beneficial owners of AT&T stock. Those shareholders whose MediaOne shares had been held by their

brokerage firms were immediately credited with the receipt

of AT&T stock plus cash. Those shareholders (the plaintiff
No. 05-4398 5

and the members of her class) who possessed share certificates might not get their new cash/stocks right away, but

they had a firm entitlement to their proportionate share of

the cash and stock that AT&T had set aside to fund the

acquisition of MediaOne. The alleged fraud—the omission

in Georgeson’s letter of December 15 of any mention of the

free option—happened afterwards and had nothing more to

do with federal securities law than if Georgeson had asked

the MediaOne shareholders “do you want your AT&T

shares sent to you by regular mail or by courier?” and had

charged an inflated fee for the courier service. Or if AT&T

had said “if you don’t want your spouse to learn about your

good fortune, we’ll send you your shares in a brown paper

envelope”; and later the spouse failed to claim the shares in

her divorce proceeding and sued AT&T and her husband

for fraud.

AT&T didn’t want the shareholders of the firm it had

just bought to wake up one day and find that their part of

the sale price had gone not to themselves but to a state.

Hence the three notices—though why the last one neglected

to remind the shareholders that they could still protect their

stock from being escheated without having to pay $7 a share

to another company is a puzzle, as well as the foundation of

the fraud claim (about the merits of which we express no

opinion). Presumably Georgeson showed AT&T the letter

before mailing it; it was, after all, on AT&T’s stationery.

This would be a different case from the standpoint of

SLUSA had the MediaOne shareholders been induced by

fraudulent representations by AT&T to vote for the merger

and as a result ended up with AT&T stock worth less than

the MediaOne stock that they had exchanged. E.g., Dasho v.

Susquehanna Corp., 380 F.2d 262 (7th Cir. 1967); Dennis F.

Dunne, “Stock Repurchase Agreements in Bankruptcy: A
6 No. 05-4398

Tale of State Law Rights Discarded,” 12 Bank. Dev. J. 355,

386 (1996). It is true that one option offered in the December

15 letter was that Georgeson would sell the recipient’s

shares and send him the cash if he preferred that to stock

plus cash. But it’s not as if Georgeson was trying to buy the

shares on the cheap. The $7 fee it was charging for its

service was its entire consideration and was the same

whether the recipient wanted cash or shares. Georgeson

acquired no investment interest. Shareholders would take

up Georgeson’s offer of the cash alternative only if they

didn’t want to own AT&T shares; it was their choice

entirely.

One could speculate—though the plaintiff does not—that

someone who had planned to sell the AT&T stock to which

he was entitled as a result of the merger, but to do so later

on rather than immediately, might accelerate his decision

when he learned that it would cost him $7 per share to

obtain the stock; he might do this in order to avoid a

future brokerage fee on top of the $7. But that is no different

from what would happen if a bank charged an exorbitant

fee for a safe deposit box in which to keep one’s shares of

stock: some people would decide to sell their stock rather

than pay the fee. One would hardly say that a class action

against the bank in such a case would be an action “involving nationally traded securities,” Merrill Lynch, Pierce, Fenner

& Smith, Inc. v. Dabit, supra, 126 S. Ct. at 1514 (emphasis

added), which is the Supreme Court’s characterization of

SLUSA’s scope.

The defendants argue that since Georgeson’s service

charge was calculated on a per-share basis, the effect was to

reduce by $7 the value of each of the AT&T shares that the

MediaOne shareholders who accepted Georgeson’s offer

received. But that is like saying that if the shareholders had

received their AT&T shares and later sold them, the value
No. 05-4398 7

of their shares would have been diminished by the brokerage fee on the later transaction. What happens to shares

after they are sold is not “in connection with” the sale. The

merger was the sale. That the beneficial owners who

responded to the December 15 offer paid money to make

sure that they got the shares rather than the state was no

different from their paying a bank to keep the share certificates in a safe-deposit box.

The defendants have confused a transaction with its

sequelae. After you buy a car and drive away with your

new possession, much can happen to affect the value of

your purchase. If what happens is traceable to something

that occurred before the sale was complete, such as a

defective engine block, you may be able to undo the sale

on the basis that that something happened “in connection

with” the sale. But if something happens after the transaction is complete to make it less worthwhile to you, such as

the dealer’s replacing a tire that has worn out with one that

is the wrong size, it is a separate wrong, not anything

connected with the original sale unless the wrong is a

breach of warranty.

Of course there is a literal sense in which anything that

happens that would not have happened but for some

prior event is connected to that event. In that sense the fraud

of which the plaintiff complains is connected to the merger,

without which there would not have been such a fraud

against the plaintiff and her class. But in the same sense the

fraud is connected to the Big Bang, without which there

would never have been a MediaOne or even an AT&T.

Gurwara v. LyphoMed, Inc., 937 F.2d 380 (7th Cir. 1991),

illustrates the limitations of “in connection with.” It held

that an employer’s refusal to sell an employee stock to

which he was entitled by his employment contract was
8 No. 05-4398

not an act “in connection with the purchase or sale of

securities.” The alleged “misrepresentation went only to [the

plaintiff’s] opportunity to purchase the stock at the described price. It in no way related to the value of that

stock . . . . . [It] did not go to the value of the stock at issue

or the value of the consideration in return for it ” Id. at 382-

83; see also Green v. Ameritrade, Inc., 279 F.3d 590, 598-99

(8th Cir. 2002).

Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d

Cir. 1984), makes the general point that the cases just

cited illustrate: a mere “but for” cause linking a securities transaction (here, the merger of MediaOne into AT&T)

to a subsequent injury (concealment of the option to receive the Standard Election without paying any fee) does

not make the injury one suffered “in connection with the

purchase or sale of securities.” Otherwise SLUSA would

apply to a class action by shareholders who suffered

paper cuts when they opened the letters informing them

of their rights under the merger.

Ketchum v. Green, 557 F.2d 1022 (3d Cir. 1977), nails down

the point: two directors alleged that they had been fraudulently induced to cast a vote that ultimately enabled

other directors to fire them, which triggered a provision

of their retirement plan that required terminated employees

to resell their stock to the corporation at a discount. The

fraud, they argued, was thus “in connection with the

purchase or sale of securities.” The court disagreed. It was a

classic but-for case: the loss on the sale would not have

occurred had it not been for the fraud, but the fraud had

nothing (else) to do with that loss. As we said in FrymireBrinati v. KPMG Peat Marwick, 2 F.3d 183, 189 (7th Cir. 1993),

“the ‘connection’ requirement must be taken seriously.” Cf.

Bellah v. First Nat’l Bank, 495 F.2d 1109, 1114 (5th Cir. 1974).
No. 05-4398 9

If any doubt remains that the alleged fraud should not

be deemed in connection with the purchase or sale of

MediaOne stock, consider the issues that are germane to

whether the Georgeson letter was indeed fraudulent. They

have nothing to do with efforts to manipulate the prices

of securities, with failure to make full disclosure of all

facts known to the seller or issuer that might be material to a

purchaser, with the regulation of stock exchanges, or with

any other concern of federal securities law. They are gardenvariety issues of state-law consumer fraud, such as whether

a statement in the December 15 letter inviting the recipient

to call Georgeson if he had any questions, in conjunction

with the references to the free EquiServe option in the two

previous letters, gave the class members enough information that they should blame themselves for accepting

Georgeson’s offer. It would be the same kind of case had the

letter invited the recipient to pay $7 for Linux software that

he could download for free from the Internet.

The purpose of SLUSA was to prevent plaintiffs from

making an end run around the restrictions on suits for

federal securities fraud suits introduced by the Private

Securities Litigation Reform Act of 1995, Pub. L. No. 104-67,

109 Stat. 737, 15 U.S.C. §§ 77z-1, 78u-4, by filing the

suits in state courts under state law. Merrill Lynch, Pierce,

Fenner & Smith, Inc. v. Dabit, supra, 126 S. Ct. at 1510-11; see

Michael A. Perino, “Fraud and Federalism: Preempting

Private State Securities Fraud Causes of Action,” 50 Stan. L.

Rev. 273 (1998). The terms of a statute can carry beyond its

purpose, to prevent the opening of loopholes. But we do not

see how an interpretation that would allow removal in this

case could do that. The plaintiffs are not trying to litigate a

securities fraud case, but instead a consumer fraud case

against companies that have made no effort to influence the

purchase or sale of a covered security. “Congress, in
10 No. 05-4398

enacting the securities laws, did not intend to provide a

broad federal remedy for all fraud.” Marine Bank v. Weaver,

455 U.S. 551, 556 (1982).

There is one more point to note about this case. The

defendants want to be in federal court. And the complaint

that the plaintiff filed in state court actually alleges the

essential facts that demonstrate the presence of federal

diversity jurisdiction, which would enable removal because

the defendants are not citizens of the state (Illinois) of which

the plaintiff is a citizen. (AT&T is a citizen of New York and

Georgeson a citizen of New York and Delaware.) Yet the

removal petition does not mention diversity; nor has either

defendant asked us to retain jurisdiction on the basis of

diversity. Georgeson’s lawyer told us that the defendants

had not sought removal on the alternative ground of

diversity because they were certain there was jurisdiction

under SLUSA. That was a mistake, but he added that he

doubted that the plaintiff’s complaint satisfied the requirement that the amount in controversy exceed $75,000. That

was another mistake.

The complaint alleges compensatory damages of $1,645

(the 235 MediaOne shares that the plaintiff exchanged

through Georgeson times the $7 fee) plus punitive damages

in an unspecified amount. When the award of compensatory

damages is large, a punitive-damages multiple in excess of

single digits is presumptively unconstitutional. State Farm

Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408, 425

(2003). But a higher multiple is permissible when the

expected award of compensatory damages is so small that

it would be unlikely to induce a suit even of compelling

legal merit, especially if there are multiple victims and an

indication that the tortfeasor has been eluding liability

successfully. Mathias v. Accor Economy Lodging, Inc., 347 F.3d
No. 05-4398 11

672 (7th Cir. 2003). For these are further indications that

without a hefty award of punitive damages the wrongful

conduct will not be deterred.

In Mathias each plaintiff had received an award of $5,000

in compensatory damages, and we upheld a further award

to each of $186,000 in punitive damages—a ratio of 37.2 to

1. In this case, an award of $73,355 in punitive damages

would be necessary to get the plaintiff to the $75,000

threshold that one must cross to satisfy the amount-incontroversy requirement. That would be a higher ratio than

in Mathias. But since the compensatory damages sought

in this case are little more than a third as great as those in

that case, one could not say as a matter of law that the

plaintiff would be unable to cross the threshold; and therefore this case really is within the diversity jurisdiction.

Some cases, it is true, appear to make the permissible ratio

of punitive to compensatory damages depend less on the

factors we have stressed than on how egregious the defendant’s wrongdoing was—the more egregious, the higher the

permissible ratio. E.g., Planned Parenthood of Columbia/

Willamette Inc. v. American Coalition of Life Activists, 422 F.3d

949, 962 (9th Cir. 2005). Egregiousness is of course highly

relevant to the appropriateness of awarding punitive

damages at all, and sometimes to the amount. But it is

relevant to the ratio of punitive to compensatory damages

only insofar as the greater the punitive damages are, the

higher the ratio of punitive to compensatory damages is

likely to be. The proper focus of analysis of the ratio itself is

the adequacy of the combined award of compensatory and

punitive damages to motivate the prosecution of a meritorious claim. If compensatory damages are slight, a single-digit

ratio is likely to be insufficient. And that appears to be the

case here.
12 No. 05-4398

We assume that the defendants would prefer to litigate

the plaintiff’s Illinois tort claim in federal court. But as they

have never suggested diversity as a basis for citizenship,

insisting instead on placing all their jurisdictional eggs

in the SLUSA basket, there we shall leave them.

The judgment of the district court is reversed with

instructions to vacate all previous rulings in the litigation

and remand the case to the court from which it was removed.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—9-6-06